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2022-06-01 10:50:00

EUROPEAN BAN ON RUSSIAN OIL

EUROPEAN BAN ON RUSSIAN OIL

PLATTS - 31 May 2022  - EU leaders agreed a compromise deal to ban Russian oil imports by sea late May 30 in a move set to phase out almost 90% of Russian oil imports into the trade bloc by year-end and trigger a major upheaval in global oil trade. 

Following weeks of negotiations over the EU's latest Russian sanctions plans, land-locked Hungary finally accepted an exclusion for access to Russian crude via the Druzhba pipeline. 

First proposed on May 4, the EU's sixth sanctions package against Russia was designed to ban its crude imports into the bloc within six months and halt flows of its oil products by the year-end to help hit Moscow's oil revenues. 

EU Council President Charles Michel said in a Tweet the new sanctions will immediately impact 75% of Russian oil imports. After the initial proposal, S&P Global Commodity Insights estimated that the sanctions would hit some 2.1 million b/d of Russian crude imports within six months, assuming some 200,000 b/d still flowing to Hungary, Slovakia and the Czech Republic. Another 1.2 million b/d of refined product imports would cease by the end of the year. 

Poland and Germany had already committed to end Russian crude imports via the Druzhba pipeline by the end of the year, raising the ban coverage to around 90%. This left about 10% of Russian supply covered by the Druzhba pipeline to Hungary, Slovakia and the Czech Republic, European Commission President Ursula Von der Leyen said. 

"The Council should now be able to finalize a ban on almost 90% of all Russian oil imports by the end of the year," Von der Leyen said after the deal. "This is an important step forward. We will soon return to the issue of the remaining 10% of pipeline oil." 

ICE August Brent crude futures rose by 2% from the previous close up to $120.16/b as markets reacted to the move. Platts assessed physical Dated Brent at $122.335/b on May 30, data from S&P Global Commodity Insights showed, the highest since March 25. 

The EU's sixth sanctions package against Russia also disconnects Russia's biggest bank Sberbank from the Swift international banking payment system, bans insurance and reinsurance of Russian ships by EU companies, and bans three major Russian state-run broadcasters in the EU.

Russian oil flows

The EU's oil embargo on Russia will take a heavy toll on Europe's oil supply and fuel flows. Before the Ukraine invasion, 60% of European imports of diesel have come from Russia, a dependency that rises to 70% for Northwest Europe, while in the Mediterranean 25% of diesel imports come from Russia. 

Even before the EU had proposed oil embargo on Russia, self-sanctioning by European refiners and independent traders has seen seaborne flows of Russia's Urals crude to the EU fall by some 750,000 b/d in April and May from 2.75 million b/d in February, according to shipping analytics firm Kpler.

After most German and Polish refineries halted or cut back imports of Ural's crude through the Druzhba pipeline, Russian export flows via the key route are also likely well below its normal 1 million b/d capacity.

Russian exports of diesel, heavy fuel oil, vacuum gasoil, or VGO, naphtha, gasoil, jet fuel, and gasoline into the region have dropped by a smaller amount, according to Kpler. Total Russian oil products shipped to the EU in April slipped to about 1.4 million b/d in April and 1.25 million b/d in May from a spike of 1.6 million b/d in February, Kpler data shows.

Russian oil imports into the EU had already been expected to fall sharply in May, however, as buyers comply with the EU's fourth sanctions package which allows for trades with Russian-listed entities under pre-existing contracts until May 15.

Even before the EU's announced proposal for a ban on Russian oil, S&P Global Commodity Insights expected to see a loss of nearly 3 million b/d in crude and product exports from Russia in the coming months as more buyers shun Russian oil.

OPEC+ reaction

But even as Europe has cut its dependence on Russian oil, India and China have increased their imports of Russian crude, taking advantage of discounted prices, prompting Middle Eastern producers to seek more outlets for their crude in Europe.

In their previous meetings, the OPEC+ alliance has said it sees the oil market as balanced, with ministers saying the current surge in fuel prices is mostly due to a lack of refinery capacity and geopolitics that are out of their control.

One OPEC+ delegate said the producer group is likely to wait and see how the new EU measures actually impact Russian flows, as the current sanctions regime has mostly shifted exports to other regions.

"We're looking at the physical market," the delegate said. "This talk [of banning Russian oil] has been going on for a long time. We have our tools to judge the physical market. We know the customers, we know the demand. We'll see if there's an impact."

Some oil traders had anticipated a rise in Middle Eastern official selling prices bound for Europe in response to the cut in Russian oil purchases, as more European refineries seek alternative sour barrels. Iraq's Basrah Medium and Saudi Aramco nominations have become popular choices for European refineries as they seek suitable alternatives to medium sour Urals. 

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